Crunching SMSF returns for FY18

SUMMARY: A positive year all all asset classes. How did you perform as SMSF investment manager? Did you beat 8.25%?

Nothing blew anything out of the park, but it was a solid year across investment markets. You should have every reason to smile.

Unlike last year, when fixed interest dipped into a rare negative, all asset classes were in positive territory. Nobody’s overall return should have been in the red – unless your fund had ridiculous amounts of Telstra and AMP.

However, the returns from defensive asset classes continued to be anaemic.

As the investment managers of your self-managed super fund, you are actually accountable to no-one but yourself. You don’t have to compare yourself to anyone. You’re not going to lose a mandate to manage funds if you underperformed.

But you should be benchmarking yourself. And that is the aim of this annual article. So, have you tallied up your performance yet? How did you go?

The number that you should have aimed to beat this year is 8.25%. That’s the return that you could have got, after fees, from taking the management headaches away from yourself and simply investing via index managers.

Last year, the figure was 7.93%, so, arguably, your performance as manager should have marginally better this year than last.

(And for those wanting the three-year figure, you should have returned 6.88% compound over the last three years, up from 6.66% in the three years to 30/6/17.)

The sort of return your portfolio achieved last financial year will, of course, be dependent on the assets your SMSF holds.

The truly defensive – those with the majority of their funds in cash and fixed interest investments – had returns that won’t have impressed, though were stronger than last year. As we know, interest rates have been on the bottom deck for years, which has impacted on both asset classes.

Having growth assets – shares and property – is where you needed to be to have got the sort of returns that gave you a chance of double-digit returns.

For consistency, the overall returns in the tables below continue to use the hedged versions of the international products.

In most of these annual articles, I’ve had to warn that not being invested in international assets has been to your detriment, as international shares particularly have largely had better years than domestic equities.

However, Australian shares and property topped the list this year. Not by outstanding amounts. But Australian shares were around 1.6% better than being offshore, and Australian property was around 7.5 percentage points the better performer than international property.

It’s the act of diversifying these assets that helps to reduce risk and smooth out returns. To what extent you should be diversifying, and into which asset classes, will depend on your risk profile.

Obviously, the more defensive, the more that is in cash and fixed interest. The more aggressive, the more that is in property and shares. The following tables show the sort of return you could have expected, from defensive thorugh to aggressive. Defensive investors are completely invested in cash and bonds (0-100), while aggressive investors are 100% in property and shares and none in defensives (100-0). The moderate investor is 60% property and shares and 40% cash and fixed interest (60-40).

Table 1: One year returns for FY18 by risk profile

Risk

Cash

Fixed

Property

Australian

International

Total

Profile

Interest

Shares

Shares

Defensive (0-100)

0.72

1.58

0.00

0.00

0.00

2.30

Conservative (20-80)

0.36

1.58

0.52

1.18

0.69

4.33

Moderately Conservative (40-60)

0.18

1.32

1.04

2.23

1.49

6.26

Moderate (60-40)

0.09

0.92

1.04

3.67

2.53

8.25

Moderately Aggressive (80-20)

0.09

0.39

1.04

5.24

3.45

10.21

Aggressive (100-0)

0.00

0.00

1.04

6.55

4.60

12.18

Note: The performance figures under the asset classes is the amount, in percentage points, that the asset class contributed to the “Total” column. See Table 3 for asset allocation.

As above, the moderate investor should have managed to improve on last year’s return marginally, with a total return of 8.25%. The more aggressive investors were able to eke out nearly an extra 2 percentage points per risk profile, while the most aggressive investors should be aiming this year to achieve 12.18%.

The return, year on year for low risk takers was actually a big improvement. Defensive investors got 0.48% in FY17, but improved to 2.3% this year, while conservative investors improved from 2.4% to 4.33% from year to year.

SMSF investors, to a degree, should be focussed on slightly longer return periods. And certainly many are.

So how should you have performed over a three-year period to 30 June 2018?

The returns for the combined FY16, FY17 and FY18 period are actually quite “normal”, with what classic investment theory would suggest should generally be the profile of risk versus return.

That is, as you progressively take more risk, you are progressively more rewarded.

The returns of the individual sector funds for Vanguard (after fees) for three years were:

Cash Reserve Fund: 2.1%

Australian Fixed Interest: 3.21%

International Fixed Interest (hedged): 3.67%

Australian Property Securities: 9.91%

International Property Securities (hedged): 7.62%

Australian Shares: 8.96%

International Shares (hedged): 9.89%

Australian property is, just, sitting atop on performance, edging out international shares by just 2 basis points.

What I find interesting is that institutions and commentators have been warning for many years to expect lower returns into the future. The three year figures – and that commentary must have been running for three years by now – shows that returns are still, roughly, where they are expected to be.

A moderate return is around 7% and an aggressive return around 9%.

Table 2: Three year returns (FY16, FY17 and FY18)

Risk

Cash

Fixed

Property

Australian

International

Total

Profile

Interest

Shares

Shares

Defensive

0.84

2.02

0.00

0.00

0.00

2.86

Conservative

0.42

2.02

0.46

0.81

0.59

4.30

Moderately Conservative

0.21

1.69

0.91

1.52

1.29

5.62

Moderate

0.11

1.18

0.91

2.51

2.18

6.88

Moderately Aggressive

0.11

0.51

0.91

3.58

2.97

8.07

Aggressive

0.00

0.00

0.91

4.48

3.96

9.35

With inflation over the last three years averaging around 1.7%, the returns are overall pretty strong, with perhaps the exception of defensive investors.

Moderate investors are getting a return of more than inflation + 5.1%, while the most aggressive investors are getting inflation + 7.65%. If maintained over even longer terms, these are certainly strong.

For those wanting to know what asset allocations were used to achieve the blended risk profile performance figures, see table 3.

Table 3: Asset allocation across risk profiles

Asset Class

Defens-ive

Conserv-ative

Moderately

Conservative

Moderate

Moderately Aggressive

Aggressive

Cash

40%

20%

10%

5%

5%

0%

Fixed Interest

60%

60%

50%

35%

15%

0%

Property

0%

5%

10%

10%

10%

10%

Australian Shares

0%

9%

17%

28%

40%

50%

International Shares

0%

6%

13%

22%

30%

40%

Total

100%

100%

100%

100%

100%

100%

For fixed interest, property and international shares, a split of 65% domestic and 35% international was used.

Notes on this annual exercise: The point of this annual article is to show SMSF trustees what sort of returns they could have achieved if they left everything to index fund managers, who charge tiny fees to try to get a return within a small margin for error from the major indicies.

I realise that’s not why most trustees take on the role, or start their own SMSF, but this article is also designed to be a reminder of how you can take on the investment risks about which you believe you might have some expertise (such as, perhaps, Australian shares, cash and maybe even fixed interest), while outsourcing the investment management for other asset classes, such as international shares and property, or even domestic REITs to low-cost index fund managers.

Mainly, it is designed to give you a benchmark for you to use to compare your SMSF’s performance.

*****

The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.